As many MB readers saw on Thursday’s episode, SharePHIL hosted an event to talk about index rebalancing and how retail traders could try to use these events to generate profits. SharePHIL is a non-profit that promotes minority shareholders’ rights to “level the playing field” with the rich and connected. MB readers will know that this advocacy is close to my heart.
The event: The first guest, Mark Frederick Visda from the PSE, provided a great overview of the different indices that exist, and how they are traded. He said that the funds which track the PSEi have over P150 billion in capital under management, and that 72% of all PSE trading volume comes from the trading of the 30 stocks that make up the PSEi Index. Mr. Visda said that the PSEi and the MSCI PH indices are very closely correlated in terms of value. He also said that since the criteria for inclusion are public and the process is transparent, there is a considerable amount of speculation that can be seen in terms of the liquidity spikes in stocks that are rumored to be potential inclusions, and in the stocks that are rumored to be potential exclusions. There was a speaker from MSCI that talked about ESG investing, but this section didn’t seem to relate to the webinar’s thesis of learning how to “play” rebalancing events. The panel discussion afterward was actually very eye-opening, as underwriters, fund managers, and other professionals just talked casually about how the index. This is where some of the most interesting bits of information came out, but not necessarily in terms of teaching retail investors how to specifically execute rebalancing plays.
Learning #1: The funds that track the PSEi are not “forced” to sell all of their shares if a company is excluded from the PSEi. I had always thought this was the case (and so did the underwriter on the panel), but the fund manager said that most funds have the ability to carry 10-15% of their fund’s value in stocks that are not a formal component of the PSEi, and as such, they are not structurally forced to sell.
Learning #2: The PSE operates with a “trust factor” with respect to the true nature of a company’s public float. The float was raised by the PSE as a huge driver of liquidity, which is a critical factor when it comes to a stock’s inclusion into the PSEi, but the fund manager indicated that it’s something of an open secret that there are companies that juice their liquidity stats by having insiders buy shares through distant family members, nominees, and through shell companies located in corporate secrecy jurisdictions, like the British Virgin Islands. The PSE said that it relies on companies to “respect the true nature” of the public float, and that it does investigate and double-check float ownership from time to time, but that it doesn’t publicize the results of its findings for fear of rocking the boat.
Learning #3: Underwriters, when advising a potential IPO of a company that could eventually become a component of the PSEi, will try to price the IPO low enough initially to generate enough volume to support an early inclusion into the PSEi, with the hopes of that early inclusion giving the stock price a further boost. I feel like I suspected that this was something that underwriters and owners thought about, but it was refreshing to hear it discussed so openly. The underwriter talked about the tension between the owners’ need to maximize the proceeds of the sale, and the stock’s need to generate post-IPO trading interest to obtain that value-bump from entrance into the PSEi.
MB BOTTOM-LINE
Someone who logged in with pen in hand ready to take down some specific notes on how to actually trade the inclusions and exclusions to the PSEi was probably somewhat disappointed, but anyone who watched the PSE presentation and listened to the panel discussion learned an amazing amount about how our stock market actually works.
To watch a panel of pros talk about the market like this as though they were just sharing a morning coffee is the kind of access to the behind-the-scenes life of the stock market that we retail investors never get, unless we just happen to be at the right Starbucks at the right time while we awkwardly linger, waiting for a small Americano and a cookie that we shouldn’t eat (but still do every day).
I applaud SharePHIL for bringing this panel together, and I encourage professionals from all parts of the industry to take part in such panels in the future, as the more the public knows about how this all works, the more engaged they’ll be.
Yes, the market is frustratingly shallow and concentrated, but understanding more about how it works and why it works the way it does is the best way (in my opinion) to avoid getting trampled by the elephants and swallowed by the whales that run the show.
The best way to make money (and protect against losing money) is to learn more about how it works and flow with it.
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